Medplus Health Service second largest pharmacy retailer

Deven · January 1, 2022, 7:09am

Medplus Health Service Ltd. (Medplus)
the second largest pharmacy retailer in India. The company was founded in 2006 by Dr Gangadi Madhukar Reddy. He holds a bachelor’s degree in medicine and surgery and a master’s degree in business administration from the Wharton School.

Marquee investors: Lavender Rose, belonging to the Warburg Pincus group, and affiliates of Premji Invest,

IPO: The issue of Rs 1398 cr includes an offer for sale of Rs 793 cr and Rs 600 cr fresh issue.

2,165 stores in 242 cities across Tamil Nadu, Andhra Pradesh, Telangana, Karnataka, Odisha, West Bengal and Maharashtra as of June 30, 2021. Total of 14,762 permanent full-time in-house employees working for us in a range of business activities.

Omnichannel platform enables us to service customers through stores as well as online channels, thereby enabling co to leverage the strong offline channels to establish and grow an online presence.

In Modern B&M Stores: Mkt share of Apollo is 41%, Followed by Medplus as 21%.

Market share is shifted from traditional retail to modern retail and online.

Store count and revenue comparison for top 3 modern retailers:

Revenue and Valuation:

Source: Nirmal Bang report
Apollo Pharmacy is the largest player however it is part of Apollo Hospitals and separate numbers are not available. There is no other pure-play pharmacy listed hence it is not possible to compare Medplus with peers.

Notes taken from various sources:

To date (1/1/2022, CMP: Rs 1037, PE 194) Market Cap is 12,376 Cr.
PharmEasy valuation: $5.6 Billion (October 2021) - App Rs. 42,000 Cr.
Private label latest share is 13.5% which is higher than Apollo.
10% organised 90% unorganised – 26% is the market share by Medplus in the organized sector.
60-65 are franchises other are company-owned. The company stopped giving franchises for long.
Medplus offers a 16% discount and their margin is 19-20%.
Average sales is Rs. 50000 / store / day – 2.85 lakh / month.
Expense / store (Mota-moti): Rs. 37.5 k rent, 80 k salary, 20 k other costs = 1.40 k cost.
Margin/store: 9-10 % store level margin out of that 2% corporate cost, 3% warehouse cost. 5% EBITDA at the company level.
India has 500000 retailers – 50000 distributors in pharmacy retail.
90% of Medplus purchase is directly from pharma companies. 10% from other distributors.
Pharmacy retail: 23 B USD to 36 B from 2020 to 2025.
Pharmacy retail organised retail growth rate is 25% CAGR vs unorganised sector growth is 7%. The organised retailer will grow from 10% in FY 2020 which is estimated to reach 19.6% in FY 2025.
(Minus) -31 % margin will be for the online players. Online player burns money.
Medplus is No1 in Bangalore, Chennai and Kolkata, No 2 in Hyderabad. No 1 Apollo has 4118 stores, 3rd is wellness forever has 223 stores.
The company started with 48 stores in 2006 now 2326 as of 30/9/2021. 635 stores in (FY 2010) – 1199 stores in (FY 2015) to 1653 stores in (FY 2019), 1775 in 2020 to 2081 in 2021
Their e-commerce sale is 9%. In absolute value, the same is higher than the pure eCommerce company of India.
The company adds 700-800 stores per yr.
18.5 revenue is from FMCG.

Plus point:
I. Management: Qualified with a proven track record
II. Growth should be good, adds 700-800 stores year
III. Private label share will increase which give more margin
IV. Aim to be No 1

Key Risks and Concerns:
A. Changes in prescription drug pricing and commercial terms could adversely affect operations and financial performance.
B. Higher competition: Need to see how company deals increase in e-commerce competition.

Disc:
Didn’t get an allotment in IPO. Added on the day of IPO to date. It’s +2% of my PF. Am looking for a counterpoint for fair discussion. Not a Sebi registered and views are biased.

manojag · January 1, 2022, 8:32am

Medplus PPT.pdf (2.9 MB)

manojag · January 1, 2022, 8:33am

Pre-IPO Analyst Meet: Medplus Health Services - YouTube more insights on the company

luckbychance · January 1, 2022, 9:00am

I guess a key point here is how can a minor player like MedPlus can survive the onslaught from NetMeds (Reliance), 1mg (Tata) and Sasta Sundar (Flipkart)? Also, what competitive advantages would MedPlus have over these players? Since the same product is getting distributed by all pharmacies, is there any form of customer stickiness?

Need to understand the sourcing dynamics - I found it interesting that one of MedPlus’s investors is / was Natco Pharma. If either of the pharmacies can source directly from pharma companies, maybe the supplier relationship stickiness can act as a key competitive advantage.

Otherwise, I’m unsure of what would make MedPlus beat the competition?

Fantastic writeup otherwise @Deven

navneetsinghvi · January 1, 2022, 10:46am

I am using medplus stores.
straight up discount over a certain amount range or equivalent medplus points. I usually use offline mode.
from points you can buy some pre-specified stuff which is cool, IMO.

not sure if these little things can keep it in fight with Reliance, tata likes …as other than above there is nothing noteworthy.

there is a possibility that over the period of time, these giants buyout medplus.

luckbychance · January 1, 2022, 11:32am

Just trying to understand this business better. I noticed that much of netmeds TV commercials are focussed on speedy delivery. And the above news article also places emphasis on RIL’s indirect omni channel strategy to deliver the medicines. Now if you have a home grown system of brick and mortar stores, the efficiencies are naturally higher due to the following reasons:-

Direct procurement from pharma companies and stocking them in your own stores leads to less leakage of margins than getting the medicines delivered from your partner (acting as an e-aggregator basically)
As a large company, can negotiate rentals better and this ultimately leads to better financial power - perhaps shows in MedPlus offering higher discounts?

So, it does appear that MedPlus may have an advatage over others courtesy its omni channel presence.

I’d actually invite @sahil_vi on this thread since I know he is invested into SastaSundar which is a pure play e-pharmacy unlike MedPlus and would have researched this.

Deven · January 1, 2022, 12:42pm

Appreciate your comment @luckbychance.

As per my opinion, this is not winner takes all market. Both Modern Retail (MR) and online (hence omnichannel) will survive. The loser is unorganised retail.

Medplus is not small fish in a pond, indeed they are small compared to conglomerates like reliance, Tata overall. However, Medplus is 9.3x higher store count vs 3rd player. As per the founder, when they started in 2006, there were 15-20 chains like they started, most got vanished eventually.

As far as online channel is concerned; omnichannel (Apollo & Medplus) has an advantage over the pure online player like Medplus able to deliver 93% order within 2 hours in selected cities.

Q: Online is their 9% of revenue. In one talk management said that we are bigger in online sales vs the largest pure online player. I believe they were referring to Pharmeasy. As per March 2020 online revenue for Medplus is 9% of 2871 cr = 258 cr. However pharmeasy revenue is Rs 637 crore in FY20. Am missing something?!? Appreciate clarification from any VP friend.

Disc: As above

luckbychance · January 1, 2022, 1:24pm

Did some google trends search. MedPlus is absolutely dominating the locations where it claims it is currently the leader:-

Also the DRHP is interesting. Some screenshots.

Omni channel has recorded the highest growth CAGR among all peers and the article posted on Reliance’s strategy to go omni channel via tie-ups with traditional kiranas indicates some form of superiority of the model over pure play epharmacies:-

image704×285 51 KB
Financial metrics. I think the most important metric here is operating EBITDA and mature stores EBITDA (free cash flow machines). As can be seen that while the margins are high, due to sales growth out of nearly zero incremental capex, the ROCE is >60%.

image623×543 146 KB
Competitive advantages

Interesting. Reminds me of IndiGo. They placed huge orders of one aircraft type, which just led to huge efficiency gains overtime.

Specifically on the first point - this advantage would not be available if online pharmacies deliver via their offline unorganised partners. In that sense omni channel players will benefit unless ofcourse online pharmacies do a centralised procurement even for their offline partners (difficult)

Why 2 hour delivery is important? Because the discounts are lower on acute drugs (urgently needed) vis-a-vis chronic drugs. And you can only deliver it if you have a well organised B&M infrastructure.

What are competitors doing?

Basically copying what MedPlus and Apollo are doing but the target is very small and notice how they’re not targeting cities / metros where MedPlus is dominant.

I don’t see this model driving being sustainable at all. While it may be easy to scale in the short-term but cost advantages available to at-scale players like MedPlus will eat the market share.

(article link Tata-owned 1mg, PharmEasy go offline for omnichannel presence - The Economic Times)

hemavanteru · January 1, 2022, 3:51pm

Dear All,

In Hyderabad, during last year some tie-up occurred between Medplus and Apollo Pharmacy. I came to know through the news papers. It seems Apollo Pharmacy purchased some stake in Medplus. Competition wise , all the businesses from other Business houses may or may not successful. In Case of Reliance jewels vs Titan, reliance retail vs Flipkart or D-mart . The observation is Reliance is always acquire an inddirect exposure or creeping type of exposure. with this Retail Investors may not loose any thing.

nityanandparab · January 1, 2022, 5:02pm

One major difference between Medplus Online strategy and other online players is Medplus is not burning cash to acquire customers by giving higher discounts. They are cautious in increasing their online presence wherein if customer would like to order the medicines from online channel he can opt for the same and the delivery can happen to him or he can pick up the medicines from the Medplus store of his choice. Also, Online channel delivery is only available in Metro cities. As per Management not all customers are demanding Online channel and they prefer Offline model as the medicines will be readily available from pharmacy.

Other observations
a. For the new stores they are breaking even within six months of opening their store
b. They are using cluster based approach which helps them attain profitability much sooner. For example when they decide to open new store in a metro city they get a warehouse and then they start building new stores nearby to the warehouse and in case medicines are not available in the store they can get those medicines made available in the store the next day
c. They are using Mysql, Java and Linux which helps them solve the cost related to software consumption
d. They incentivize their staff to give recommendations on new store locations
e. There is one pharmacist in each store who also act as a delivery boy to deliver the medicines within a given radius
f. Customers prefer to get all or most of the medicines from single pharmacy and if a local store can not provide those then the shift may happen to organized pharmacy retail
g. Addition of private label medicines will increase the EBIDTA

Tech Transformation steps used by Medplus
a. The have started automation in warehouse which will help them in sorting the inventory and improve efficiency
b. We all are aware that pharmacists find it difficult to understand the handwriting of doctors. If a pharmacist finds it difficult to understand the prescription then he can take snap of the same and upload the same to a centralized server and can get advise from senior team which is sitting in HO
c. They are using app to get the snap of the store location with Lat-Long which their employees can use to upload the snap to find suitable location for their new stores

Source for above info- Pre IPO analyst call and call with ICICI Direct

Disc: Invested with tracking position

luckbychance · January 1, 2022, 6:01pm

Not all. I checked today. Sitting in Delhi, I can’t order from MedPlus. Their strategy is to first build a dense physical presence and then use the online channel to provide a full Omni-channel experience to consumers.

Also I liked their website much better than PharmEasy. Provides list of alternatives unlike PharmEasy.

I think you need to compare FY21 numbers. And if they don’t match even then, consider it as a boast the promoter is extremely bullish on the business and has not sold any share as part of the OFS (clarified in the pre IPO talk).

Few interesting observations:-

60% of the orders were actually delivered in under 1 hour. Bodes well to capture market share in the acute segment (profitable)
Every 1% increase in private label mix adds 0.5% to gross margin. So if MedPlus can beef this upto 25% in next 2/3 years, we’re talking an incremental Gross Margin of 2 to 2.5% or roughly around 60crs on current revenue base (3000 crs). This will directly flow to PBT (H1FY22 PBT @ 83crs) since all other costs would remain same. My sense is that private label journey will happen faster given that India is majority generics (pointed out by the management as well).
Kerala followed by Delhi is their target market. When they speak of cluster based approach, they think of warehouse level profitability. A bit of a hub and spoke model.
Currently opening new stores at 60 to 70 a month. Average capex per store is 0.6 to 0.7cr and monthly costs are 0.14crs (estimated annual capex of 300 to 400crs assuming 600 stores; CFO could be ~320crs extrapolating H1FY22 trend; Proceeds from fresh issue at 600crs) 60% of the stores breakeven in less than 1 month. Even the stores that don’t breakeven in 6 months suffer from very low losses. Opening new stores = accelerating growth.
Working capital funding is 50 days (70 days of inventory less 20 days of payable). Target is to reduce this to 0 by increasing payable days. Already inked deals with two large listed pharma cos to offer them 70 day consignment basis supplies through better proposition (not went into too much detail here)

So what are we looking at in future:-

2600 stores by Q4FY22; (sales growth) - for reference MedPlus opened 400 stores in last 3 years (FY19 to FY21) and increased revenue by around 800crs (2200 to 3000crs)
Increasing share of private labels and lowering of work cap cycle on incremental basis (margin expansion)
PE re-rating possibly?

Lets put the above in numbers.

FY23E sales = 4700 crs (H1FY22 x 2 x 1.25) *note: 25% is the industry growth rate, MedPlus is likely to grow much much higher.
FY23E EBITDA assuming 9% margins = 4700x9% = 423crs
FY23 PAT assuming 3.75% margin = 176.25

I expect the margin to also go up courtesy better absorption of corporate costs and higher mix of private labels, lower WC days. May go as high as 7/8% (PAT margins) in the next 4/5 years. I also expect revenue to clock closer to 40% CAGR for next 2/3 years because of heavy store addition in FY22 and FY23.

Current mcap = 12340crs
Current valuation = 2.6x P/S (FY23E); 31x FY23E EBITDA; 70x PAT; 30x FY22 CFO

Pharmeasy valued at nearly 17x FY21 sales but it has shown higher sales growth (350% revenue growth in FY21 vis-a-vis FY20) than MedPlus courtesy wider reach.

manojag · January 2, 2022, 4:32am

Online player’s are having a negative 31% net margins

luckbychance · January 2, 2022, 12:43pm

CTO of 1mg saying “future is omni channel”.

Also, interesting interview of Gangadi Reddy, CEO of MedPlus.

Some interesting insights:-

Opened 350 stores in H1FY22 (per the PPT though this number is 240). Opened 70 in October. So that’s an annual run rate of 840 stores. Plan is to expand this to 1000 per year from FY23 onwards. So FY22 store addition could be 240+430 = 670. This would be >30% growth in store count over FY21. Pretty good.
Target to open 3k stores in next 2/3 years. Capex needed would be funded by internal accruals, debt and public issue
Margins to remain subdued until we are in expansion phase and to improve from thereon (promoter used the word “explode”). Note: He has not sold any share in OFS.

Ravi89 · January 3, 2022, 7:07am

Is this the future growth promised by the promoters? Because historically speaking they have just added a total of 593 stores in 4 years’ period (from 31 Mar 2018 to 31 Mar 2021). It doesn’t match with what you have posted in comments.

Deven · January 3, 2022, 8:25am

Yes, 700-800 projection is by company. In fact, they claim to expanded 350 in H1. IPO realisation is used to expand stores number.

luckbychance · January 3, 2022, 12:11pm

Their ppt says 240 odd stores though. Not sure how CEO is claiming 350

luckbychance · January 3, 2022, 2:18pm

Interview of investment banker who advised PharmEasy on the Thyrocare deal. My KTA from the
interview:-

This trend is definitely here to stay. There’s going to be many more of such deals in the coming years. Even the Tata-Big Basket and the Tata-1MG deals are additional examples of the omnichannel strategy. In the Indian context people have come to a reasonable conclusion that India needs a bit of both, physical distribution and fulfilment as well as online distribution.

We can’t really be fully digital neither can afford to be fully physical. It has to be a combination of both. Will it be a digital company acquiring a physical company or vice versa? That is a function of who has the capital and who has a better management team to drive the combined business. Certainly the thesis for such businesses to come together is pretty clear and here to stay, and we hope to do many more of such transactions.

More I dig into what peers are upto, the omni channel focus appears to be a consensus. By omni channel everyone means a certain amount of “fixed” presence. Now this is vastly different from MedPlus’s emphasis on “cluster-based” approach, which calls for bombarding the city with MedPlus stores and using them as a) spokes for quick delivery to service the profitable acute market and b) proxy for marketing spend.

I’ll again tag @sahil_vi. Maybe the commentary from peers posted on the thread would pique his mind now. I’m curious to know his thoughts since he is invested in SastaSundar - pureplay epharmacy.

Ultimately - it will boil down to (in my opinion) efficiency of the local retailer fulfilling the PharmEasy’s orders vs MedPlus / Apollo doing it on their own. For me, the former model has leakages in so far as PharmEasy has to share the system gross margin with retailers.

A good way is to evaluate the trend in cities where MedPlus claims its number 1 (BLR, HYD, Chennai) - maybe we need to get sales data / growth data / MS data from peers in these cities.

ambarish_sathe · January 9, 2022, 5:23am

A few inputs from my side

I like the company because

Huge TAM because of a. A large part of unorganised pharma retail will give way for organised retail. b. The market in itself will keep on growing for forseeable period.
Omni channel- Capturing both - immediate and regular medicines requirement will provide opportunity to address the entire market + Presence of a physical store provides a comfort and frequent brand recall.
Execution ability: Promoters have already demonstrated ability to scale up profitably over the period
Optionality: Once the platform is established, it creates optionalities in terms of creating adjacent business verticals - Diagnostics, health related supplements, FMCG etc.

However I have following concerns

Sudden scale up: There seem to be plans to scale up v significantly in next few years. Management bandwidth/ overall ability to manage this sudden scale up needs to be monitored. Further, during such scale up, it is difficult to monitor/ cross check same store growth/ profitability, overall profitability, overall accounting.
Maintenance Capex: I believe that the stores will need some amount of maintenance capex which will keep on growing along with the scale. This will eat into the free cashflows. Have not seen any mention of this during analysis so far.
Current price levels: While the TAM is huge and large scale up is expected, fact is as per last audited numbers, PAT was just 61 cr. So a v large part of future growth/ profit scale up is already captured in the pricing. There is no room for any underperformance

I plan to take some tracking position and continue to track the company performance

Sidharth_Chandraseka · January 9, 2022, 5:30am

@ambarish_sathe What do you mean by maintenance capex in stores?

ambarish_sathe · January 9, 2022, 5:34am

I believe that all retail stores need upkeep / refurbishment once in a while. I am referring to it as maintenance capex.